After the scheduled fall software upgrade to the Xbox 360, Xbox Live Gold members who also belong to Netflix can choose and watch movies on demand. This is in addition to the DVDs that you get in the mail, the old fashioned way.

It’s a good marriage, one that makes sense for both parties. With the deal, the terms of which have not been disclosed, Netflix gains access to 12 million Xbox Live members. And Microsoft gets a shot at millions of Netflix subscribers who might be swayed to buy an Xbox 360.

“Netflix helps Xbox because there are 8 million of Netflix subscribers, and three-quarters of them are the right age demographic to buy a console,” says Michael Pachter, an analyst with Wedbush Morgan. “This gives them one more reason.”

There are a few catches, though. Microsoft touted the streaming service as free, but that’s not exactly true. First, you’ll need to be a Gold-level member of Xbox Live, which costs $50 a year. And you’ll need to be a Netflix member, obviously. Even then, only membership above the base Netflix plan of $4.99 will get you access to the streaming service.

What's more, you won’t get a crack at every piece of entertainment in Netflix’s 100,000-piece library. Subscribers to this streaming/Xbox Live service may only choose from a smaller subset of 10,000 movies and TV shows.

Still, from a strategic standpoint, the deal helps reinforce Microsoft’s message that the Xbox 360 is a mainstream machine, says company corporate vice-president Shane Kim.

“The Netflix partnership is very consistent with our overall strategy that the Xbox 360 is not just about gaming, it’s also about music and it’s also about video,” he says. “We’re trying to make it clear that Xbox 360 has fun and entertainment for everyone.”

That point was clear during the briefing. Almost everyone trotted out for the briefing took care to mention that many of the games in the Xbox 360 library are rated E for everyone or T for teen. And with the software upgrade in the fall, users will see a much friendlier interface when they power up their Xbox 360.

Confirming another pervasive rumor, the software upgrade will let users create avatars (which look a heck of a lot like Miis on the Nintendo Wii) and invite their friends to a “Live Party.” The Netflix partnership means that users can also invite their friends to watch movies with them too — something that has a few attendees here pretty excited.

“I like the idea of being able to be in a game, talking with friends and someone will say something like ‘I’ve never seen Office Space.’ And thinking that I could go, stop the game and make that person watch ‘Office Space’ with me,” says Edie Sellers, contributor to podcast site GameHounds.

But can the Netflix deal, the family-friendly offerings and a recent price cut — which brings the Xbox 360 within spitting distance of the $250 Nintendo Wii — convince the average consumer to buy Microsoft’s console?

Doubtful, says Pachter, who believes the Wii audience and the Xbox 360 audiences are completely different.

“Nobody bought a Wii instead of a 360,” he says. “Most people who buy a Wii will never buy another console because they’re not interested in games.”

For those that are interested in games, Microsoft had a few more announcements Monday. “Fable 2,” the long-promised role-playing game from Lionhead Studios, will (finally) ship this fall. And “Gears of War 2?” Yep, still coming.

But the big reveal, the one that made all the fanboys in the audience giddy with glee? “Final Fantasy XIII,” the next installation of the huge Square Enix franchise, will launch on the Xbox 360 the same day as the PlayStation 3. That’s a huge blow for Sony, which counted the role-playing game series as its ace in the hole — the game that would lure any fence-sitters to finally buy a PlayStation 3.

If today’s briefing proves anything, it’s that Microsoft is trying to play both sides with its Xbox 360 strategy. The company hopes, with dual-karaoke game “Lips” and kid-friendly “Viva Pinata: Trouble in Paradise” to change the perception of their console. But at the same time, they need to dance with the guys who brung ‘em: the hardcore players.

“It is a challenge to create a product and a brand that appeals to a wide spectrum of consumers. It’s the same challenge that Nintendo will have trying to go the other way,” says Kim.